Social Entrepreneurship Is Not A New Concept In India
Mahatma Gandhi spearheaded the concept in modern India by mobilizing various enterprises such as local salt production in his famous ‘ Dandi Salt March’ and ‘Khadi’ movement. His vision was solving the problem of lack of domestic enterprise and dependence on import. He propagated economic self-reliance, employment and empowerment at bottom of the pyramid (BOP) using local resources and manpower.
We already have trailblazers in social entrepreneurship in India such as late Dr Verghese Kurien of India’s famous milk revolution popularly known as Amul, Sanjit ‘Bunker’ Roy – Founder of Barefoot College, Vineet Rai of Aavishkar Venture Management Services, Ashwin Naik of Vaatsalya Healthcare, Anshu Gupta – Founder Director of Goonj to name just a few. They are not just social entrepreneurs, they are social change makers.
However, despite being into existence in India since independence and gaining momentum mid 2000 onward, social entrepreneurship is still perceived as a new concept. People are still unaware of this model of doing business in which profit, scalability and sustainability are pursued for delivering a social good objective. It is still not clearly understood that the target beneficiaries of such ventures are always a mass section of socio-economically deprived and disadvantaged people.
Popular perception sees social enterprise as a non-profit, non-government entity.
It’s a paradox that in a country like India where social justice, equity and environmental protection are heavily flawed due to many issues, social enterprise aimed at solving this situation is not yet officially recognized as a separate legal entity. No government support in the form of regulatory norms, simplified and flexible investment and taxation regime are available to help such ventures grow fruitfully.
“There is no sector called social enterprise in India. There is no difference in terms of government policy between the regular entrepreneur and a social entrepreneur,”
– Anurag Agrawal, CEO of Intellecap, on the sidelines of Sankalp Unconvention Summit in 2014.
Current Legal Structures For Social Entrepreneurs In India
Social entrepreneurs have two options to opt for as a legal entity:
- Forming a for-profit social enterprise under the Companies Act, 2013 as a Sole Proprietorship, Limited Liability Partnership, Partnership, Private Limited or Public Limited company. The advantages and disadvantages of that are roughly as below:
Advantage – First and foremost such legal business entities traditionally help in attracting investors, credibility to access formal finance, talent and quality human resource to work for it.
Disadvantage – The venture becomes prone to a mission drift due to too much push and pull to maximize profit and Return on Investment (ROI) as soon as possible. However, the impact of a social enterprise is often intangible, difficult to measure and takes time to happen. This discourages investors.
- Forming a social enterprise as a not for profit or non-profit institution as either a company under section 8 of Companies Act, 2013, Or as a charitable Public Trust or a Co-operative Society.
Advantage – A not for profit or non-profit form of organisation immediately gets respect and legitimacy as an entity dedicated to a noble and selfless social service.
Disadvantage – The very nature of these organisations defeat their potential to attract investors and other support to work effectively and efficiently as social enterprises. The financial inflow of these enterprises depends heavily on uncertain and insufficient grants and donations which often affects their objective negatively. These organisations, especially the Trusts and Societies end up spending their fund into running the day-to-day administration or in hunting more funds. They lack the wherewithal to hire good talent to help them execute the objective. This becomes a vicious cycle and shifts their focus form their objective and eventually they fail.
The existing financial support mechanisms and auditing norms do not make a conducive ecosystem that take care of the investor sentiments and concerns as well as constraints faced by the promoters. Hence it often results in early death of such ventures.
This also calls for the need for a separate legal identification of for-profit social enterprises supported with different kind of economic incentives and regulations.
A post-graduate research project prepared by Anirudh Gaurang and Barkha Jain of Tata Institute of Social Science (TISS) reinforces, “Their options to raise funds for themselves from financial institutions highly limited. Despite the support offered in the initial stages by prominent organisations such as the Ashoka Foundation, the Skoll Foundation, and the Indian Angel Network, it is extremely difficult for social enterprises in the initial phase of their operations to find a firm footing. Most of these foundations are keen on offering fellowships or grants to those non-profits that have been around for a long period or have run their operations for a few years.”
“For this reason, non-profit social enterprises have suffered due to their complete dependence on external agencies for their sustenance.
Lack of systematic, imaginative and like-minded funding poses challenge for a for-profit social enterprise to find a footing, perform, sustain, scale and maximize profit in the initial few years. On the other hand in the absence of a continuous and convincing balance sheet and audit result over these very initial years, such institutions fail to deliver the intended social good.
A final year student from Symbiosis Law School, Pune, Rohan Thomas says, “These entities have to make a trade-off between the benefits that may be accrued by registering as a non-profit under Section 8 of the Companies Act, 2013 and as a private company. Factors like tax breaks, foreign contributions, governance structures and investors need to be evaluated in isolation of the conventional forms of, for profit and non-profit companies, given that the objectives of a social enterprise, as a sum, are uniquely different from the above mentioned forms of companies.”
He goes on to say, “In an ideal world, this sector would have adequate legal backing and a well-defined structure, thereby encouraging more and more players to enter the field. As the domino effect takes place, the social economy would then receive its due recognition and grow, positively impacting the social environment while generating revenues to sustain itself.
What’s Happening Internationally
Benefit corporation of USA
In the United States, a Benefit Corporation is a type of for-profit corporate entity, authorized by 30 U.S. states and the District of Columbia that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals. Benefit corporations differ from traditional C corporations in purpose, accountability, and transparency, but not in taxation.
B Corp is any for-profit company certified by the non-profit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Thus a B Corp certification is to business what a Fair Trade certification is to coffee or USDA Organic certification is to milk.
Certified B Corporations and benefit corporations are both leaders of a global movement to use business as a force for good. Both meet higher standards of accountability and transparency. Both create the opportunity to unlock our full human potential and creativity to use the power of business for the higher purpose of solving society’s most challenging problems. However a few important differences exist.
Some companies are both incorporated as benefit corporations and certified as B Corporations—others are just one or the other.
Community Interest Company (CIC) in UK
The CIC is a legal vehicle designed for social enterprises that are non-charitable (i.e., for-profit) but whose primary objective is the welfare of the society. The CICs are limited liability companies—either a company limited by guarantee or a company limited by shares.
The assets and profits earned are re-invested for the development of the community, and there is an asset lock limiting the distribution of profits and assets among its shareholders. A maximum of 35% can be distributed as profits, and the funds are mainly used for the social welfare of the society. This helps to prevent mission drift and caters to the cause for which the organisation was originally started.
There are no direct tax benefits for investors investing in CICs; however, indirect tax benefits through CDFIs (community development finance institutions) do exist for investments in CICs.
Individuals and corporates that invest in community development finance institutions (CDFI) receive tax relief for the amount invested, known as Community Investment Tax Relief (CITR).”
This study also mentions, “The RI-PS framework (Responsible Investment and Philanthropy Services) put forward by Credit Suisse in 2012, defines a mature social investment climate as one that fosters impact investments, which are investments made with the primary intention of creating a measurable social and environmental impact, with the potential for some financial benefits as well.”
In 2015, the Italian Parliament has also introduced a type of for-profit corporate entity named Societa Benefit in the line of B-Corp and Australia is following suit with their own version.
India is yet to have a mature regulatory system in place to bring promoters and investors of a for-profit social enterprise venture on the same page.
While some social entrepreneurs do believe a system like CIC or B-Corp may be helpful to help foster the success and growth of social enterprises in India, others think registering a social enterprise as a company under section 8 of Companies Act, 2013 would suffice its purpose.
Executive – Corporate Legal and Visiting Faculty at Symbiosis Law School, Pune, Prathamesh M Joshi feels operating under the current Company Law shall suffice. Banks and other financial institutions duly recognize Section 8 companies and hence separate entity status under Companies Act 2013 is not required. However he does agree that a good compliance mechanism would make a lot of difference.
Some believe few changes in the FCRA (Foreign Contribution Regulation Act) and Tax breaks and Priority Sector Recognition such as like SEZ (special economic zones) might help.
However, Anurag Agrawal, CEO of Intellecap explained “But more than any tax breaks or special incentives, social entrepreneurs struggle with the basics of just getting their business up and running – very often the government bureaucracy is a major roadblock.”
He also suggested, “Corporates and government could not only provide investment, but also human resource support, help with distribution networks and access to markets. These are the things that the social entrepreneurs struggle with.”
In the perspective of the pulse of the country, raring to break free of social injustice and inequality, backwardness and deprivation, it is time, a social enterprise is recognized as a new legal business entity and provided with a separate set of empathetic financial and compliance mechanisms. It will encourage young entrepreneurs to foray more into this sector. In a country like India teeming with innumerable socio-economic problems, it is not possible for government or corporates to solve all of them. That is where the for-profit social enterprises could play their role, generate employment and deliver social good. The present government should ponder over and usher in policies and schemes to support such enterprises. Only then the “New India” campaign and the campaigns such as “Start-up India”, “Digital India” and “Skill India” would be successful on the ground.